I think everyone should have to charge Vat that supplies a service, the £80,000 threshold needs to go. You could increase your price by 20% because everyone else would have too as well, so the trading platform is fair to everyone. As it stands there is a harsh penalty for you expanding your business, as soon as you do so you are penalised by having to charge Vat. That makes no sense, but the government are not formed by the cleverest people and many are actually fairly oblivious to what happens in the real world.
The big problem from the point of view of HMRC is that if every part time dog walker, mobile hairdresser, and semi-retired window cleaner came under the auspices of VAT, the number of registrations would increase phenomenally - by maybe 500% - for relatively little return. The bureaucracy of HMRC would necessarily need to increase accordingly and this would almost certainly cost more than the tax revenue raised. In short, its never going to happen!
Adrian
The headache involved with VAT would be a real menace to small companies...hence the £80,000 threshold. It could easily be argued that the cost involved in a struggling company turning over £30,000 is far more disadvantageous than for a company turning over $100,000. So, I am not with you on this one...the less red tape for small companies the better because it gives them a better opportunity to become bigger companies and provide employment.
On the contrary, Sean.
As Adrian pointed out earlier, the current VAT registration threshold of £80,000 actually acts as a big disincentive for any small business offering services to the public to expand by taking on staff.
As soon as the threshold is breached the business must register and charge VAT on ALL its turnover, not just on the amount over the threshold, This unquestionably results in many thousands of small businesses taking the strategic decision not to take on the staff needed to expand the business, as it would require a massive leap in turnover to achieve the same net profit figure enjoyed by the business while it was happily trundling along with barely a care in the world.
Take the example of a small bed and breakfast establishment with 3 letting rooms. If they charge £90 per night and have an occupancy rate of 75% they will turn over just shy of £79,000 per year, and so not have to register for VAT.
If they convert the attic into a fourth letting bedroom at a cost of say £40,000, charge the same amount per room and retain their occupancy rate they will turn over £98,550 and have to register for VAT. Of the £90 per room per night, £15 must now be sent to the government, leaving only £75. Net turnover is now therefore £82,125. Hardly any increase in turnover for 33.3% more work and a lot of expenditure!
The figures are mitigated slightly by being able to claim back the VAT on purchases, but once the tax on the capital costs has been reclaimed that is mainly food (zero rated) and labour so the amounts are minimal.
What incentive is there to expand the business?
The best option would probably be to upgrade their existing rooms, charge more in the season, close completely in the winter once the £80,000 VAT threshold had been reached, and fly to somewhere sunny.
